What latest fall in oil prices means for inflation in emerging markets?

Oil&Gas Materials 29 November 2018 10:50 (UTC +04:00)

Baku, Azerbaijan, Nov.29

By Leman Zeynalova – Trend:

The latest fall in oil prices means emerging markets’ (EM) inflation is likely to rise more slowly, according to Capital Economics, the UK-based consulting company.

While we still expect a majority of EM central banks to hike interest rates, lower energy inflation may delay tightening in a few countries. One of the positive channels through which lower oil prices will affect EMs is via lower energy inflation. This tends to arise most directly through a fall in petrol inflation – household energy bills tend to be administered by authorities,” the company said in its report.

Based on forecasts of Capital Economics for oil prices, EM fuel inflation is likely to drop sharply over the next few months, and be negative throughout much of 2019. “By our estimates, this swing in fuel inflation could reduce headline EM inflation by about 0.4 percentage points in 2019 compared with 2018.”

The impact will, of course, vary across countries, the UK-based consulting company believes.

“The drag on headline inflation from lower oil prices is likely to be greatest in those countries where petrol occupies a larger share of the consumer price index (CPI) basket (mainly in Eastern Europe). In contrast, petrol occupies a lower share of the CPI basket in the two largest EMs, China and India, so the impact on inflation is likely to be smaller,” said the report.

Capital Economics had in any case anticipated a sharp drop in oil prices, albeit with Brent crude only reaching $60 per barrel by the end of 2019. “We continue to think that rising food and core inflation will push aggregate EM inflation up in the next few months, keeping the EM tightening cycle running. “

That said, the scale and the pace of the fall in oil prices may cause some central banks to delay the start, or pause, rate hikes, said the company.

Unlike their counterparts in developed markets, many central banks in EMs tend to respond to shifts in headline inflation rates and are less likely to look through a commodity price shock, Capital Economics believes.


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